Japanese widen lead in profits

Japanese widen lead in profits http://www.detnews.com/apps/pbcs.dll/article?AID=/20070808/AUTO01/708080388/1148
TRAVERSE CITY -- As Detroit's auto executives negotiate new contracts
with the United Auto Workers, they brandish an alarming statistic: the difference between what they and their leading Japanese rivals earn in the United States.
According to a study released Tuesday, the difference widened to $3,814 per vehicle in 2006, a 32 percent rise over 2005 levels.
That gap helps explain the huge discrepancy between the financial performance of Japan's top three carmakers, which earned more than $10 billion in the United States last year, and U.S. automakers, which lost money in their home market.
But Detroit executives may be not be able to eliminate the competitive disadvantage just with changes to their union contracts. Labor costs account for $1,200 to $1,500, or less than half of the difference, said Laurie Harbour-Felax, managing director of the consulting firm Stout Risius Ross and the author of the study.
"Labor cost is a significant portion of the gap, but other factors have a greater ability to affect profitability," she said.
The biggest problem, she says, is that U.S. automakers still produce too many versions of mirrors, door handles, gear shifters and other components.
"They're not communizing platforms around the globe and individual components around the globe," she said. By contrast, the Japanese use more common parts across their vehicle ranges.
By designing fewer versions of each component, U.S. automakers would improve their own performance while helping their suppliers by allowing them to generate greater economies of scale.
Part of the year-over-year increase in the profitability gap reflects onetime restructuring and employee buyout costs at General Motors Corp., Ford Motor Co. and Chrysler, Harbour-Felax said. All three automakers are closing plants, eliminating jobs and scaling back their North American operations in line with their declining U.S. vehicle sales. Their combined share fell below 50 percent in July for the first time.
That trend suggests that Detroit's automakers still lag foreign rivals when it comes to designing vehicles that consumers want to buy, the study said. That inevitably erodes the domestics' profitability because slow-selling vehicles tend to be discounted.
Similar studies have yielded different figures, but still show a marked disadvantage in the cost structures of U.S. automakers.
According to Harbour-Felax's study, the weakness of the yen, which reduces the relative cost of exports from Japan, also contributed to the profitability gap.
"There are two huge factors -- health care and the exchange rate," said David Cole, chairman of the Ann Arbor-based Center for Automotive Research, which organized the Management Briefing Seminars in Traverse City. "Unless you deal with those, it's not going to change."
GM improved the most
Of the traditional Big Three, GM showed the biggest improvement last year, cutting its loss per vehicle to $146 from $1,271 in 2005, excluding restructuring and other one-time expenses, according to Harbour-Felax's presentation here Tuesday. But it lagged Toyota Motor Corp. by $2,123 per vehicle.
GM has outpaced domestic rivals in creating common development and manufacturing processes, and sharing parts and vehicle platforms across vehicle ranges.
"We continue to make strides in reducing the complexity in how we source and manufacture products globally," GM spokesman Tom Wickham said.
Chrysler lagged Toyota by $3,088 in per-vehicle profitability, while the gap for Ford was $3,939. Toyota was the most profitable automaker in the study, increasing its profit per vehicle to $1,977 in 2006 from $1,715.
UAW has criticized Japan
Part of that gain is due to the yen's weakness. While more than half the vehicles Toyota, Honda Motor Co. and Nissan Motor Co. sell in the U.S. are assembled in North America, many components, such as engines, are from Japan.
The UAW had no comment on Tuesday's report, but it previously has criticized Japan's currency policy as being tantamount to trade subsidies.
Last week, when Toyota reported a record $4.1 billion net profit for the April-June quarter, it said favorable currency rates accounted for more than half of the 32 percent operating profit gain.
"There are issues with the valuation of the yen," said George Magliano, an auto analyst at forecasting firm Global Insight.
But he said Japan's automakers weren't factoring in a weak yen in their plans. "Their sourcing patterns have changed," Magliano said, noting that they buy more components locally.
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